The Rush Towards Privatization 1989-1992
by Odeen Ishmael
Guyana Journal, October 2007
Confronted with a drastic economic crisis which saw Guyana drowning under the burden of a stifling, expanding foreign debt and a large payment of arrears, the PNC regime headed by Desmond Hoyte feared that all credit to the country would be completely cut off by the countrys international donors. In this situation, President Desmond Hoyte negotiated in late 1988 with the IMF which quickly arranged with the World Bank an Economic Recovery Program (ERP) aimed at re-introducing a pro-capitalist market economy to replace the failed "cooperative socialist" program of the past eighteen years.
Through this program, the government was forced to cut public spending which included curtailing funding to the state corporations, except the Guyana Electricity Corporation. Since the huge expenses in maintaining these corporations placed a serious hindrance on the economy, it became clear that the IMF through the ERP wanted the government to privatize them. The Hoyte administration, in dire need for an economic bail out, had no alternative but to agree to this action, which was a drastic reversal from its previous hard-line position on nationalization.
Only four years before, Hoyte in his address to the PNC's sixth biennial congress, had sharply condemned the external pressures on the regime to privatize the more than 40 state-owned companies. He had emphatically stated then: But let me make our position clear on this issue. While the People's National Congress remains in office, the bauxite industry, the sugar industry and the other strategic industries which we have nationalized in this country will never, never, never be denationalized. For one thing, to do this would be an admission that we are abandoning the socialist ideal, and we have no intention of doing that."
New privatization policy
The introduction of this new policy of privatization was announced at a time when the Hoyte administration was about to complete its term in office. General and regional elections were due to be held in 1990 and all the opposition political parties, especially the PPP, felt that the regime had no mandate at the late period of its term to dispose of state-owned assets.
But due to strong objections by the opposition, and even the ruling party itself, over the blatant errors discovered in the voters list, the government, using its two-thirds parliamentary majority, through emergency laws, postponed the elections and extended its life by almost two years, to allow the Elections Commission to compile a new acceptable list. This extension of the period of the Hoyte administration was intended also to carry out the day to day administration of state affairs but was not intended to be used for the introduction of new policies.
However, departing from this principle, the regime used this period to begin its privatization (or divestment) process. This action came under harsh criticism from the opposition PPP which questioned why the caretaker administration was rushing to divest state assets. The PPP also felt that by carrying out the dictates of the IMF, the PNC was hoping to win international backing for its economic policies and for its re-election in the forthcoming elections.
True to form, the PNC administration refused to consult with the opposition parties and with the private sector over the unilateral divestment of the state-owned enterprises. Local businessmen were largely kept in the dark and, in many cases, did not obtain an opportunity to bid for the purchase of some of the businesses.
PPP advice on safeguards
The PPP pointed out that privatization itself had many complications which needed to be carefully examined. As early as 1990, the party asked the government to note the following:
1. Some entities should never have been nationalized in the first place and thus should indeed be sold off.
2. A genuine tri-sectoral economy, as the PNC claimed it was propagating, should include a vibrant private sector competing with the state sector in a market economy.
3. Sales of state assets should be at current market prices, but with a prognostic link to future trends. Selling off a productive state asset, for example, in 1990 at strictly 1990 market prices, with no other input into the deal, was not sensible.
4. Non-productive assets should not be sold off at low cost, inclusive of outstanding taxes.
5. All state assets should be sold preferably for cash. If sold on the basis of credit, strict commercial principles must be made to apply to the transaction, including interest payable at market rates; installments payable on schedule; adequate security in excess of 100 percent; stiff penalty clauses for default; and options for re-possession.
6. Major strategic and productive state assets could be turned into joint ventures rather than be divested outright. There was also the need for high cost capital inputs, spares, rehabilitation, new technology, managerial expertise, and capturing of overseas
markets. As such, the foreign investor was best situated to bear these burdens in exchange for a share of the industry.
However, in deals made by the government (up to mid-1992), little heed was paid to these safeguards. This was clearly reflected in the sale prices, and it was obvious that the government failed to conduct a market intelligence survey (based on projected supply, demand, marketing, productivity) to determine how much a given entity would be worth in, say, 10 years hence. This would have enabled it to properly negotiate selling prices and/or other options.
At the same time, the divestment deals were not tabled in the National Assembly, and very scanty information about them was divulged to the public. The conclusion was that the deals involved some degree of irregularity, and most citizens believed that they were give-aways.
By mid-1992, among those significant state (and semi-state) entities divested, were the following: (1) Cooperative Wholesale Complex on Regent Street; (2) Guynec Complex on Water Street, formerly Sandbach Parker; (3) Guyana Timbers Ltd.; (4) National Paint Company Ltd.; (5) Guyana Fisheries Ltd.; (6) Guyana Rice Milling and Marketing Authority complexes at Anna Regina, Ruimzigt, Black Bush Polder, and Corriverton; (7) Demerara Woods Ltd.; (8) Guyana Telecommunication Corporation; (9) Nichimo Company Ltd.; (10) Sijan Palace Ltd., (a foreign currency shop); (11) Guyana Transport Services Ltd.; (12) Guyana National Trading Corporation; (13) Quality Foods (Guyana) Ltd.; (14) Leathercraft Ltd.; and (15) Soap and Detergents Ltd. Partially divested were two others Livestock Industry Development Company Ltd. and Guyana Stockfeeds Ltd.
Most of the above firms were sold outright, with government retaining no share in the equity. The buyers are widely known to have got unexpected bargains.
By the middle of 1992, those state assets which were listed to be sold included the following for which negotiations had already commenced or were on the verge of completion: (1) Guyana Airways Corporation; (2) Guyana Electricity Corporation; (3) National Edible Oil Company Ltd.; (4) Guyana Glassworks Ltd.; (5) Guyana National Engineering Corporation; (6) Guyana Pharmaceutical Corporation; (7) Guyana Stores Ltd.; (8) Guyana Sugar Corporation; (9) Guyana Mining Enterprise; (10) Guyana Liquor Corporation; (11) Seals and Packaging Industries Ltd.; (12) Guyana Oil Company; (13) Guyana National Printers Ltd.; (14) Sanata Textiles Ltd.; (15) Mahaica/ Mahaicony Rice Development Scheme Workshop; (16) Guyana National Shipping Company Ltd.; (17) Guyana Rice Export Board; (18) National Paddy & Rice Grading Centre; and (19) Cooperative Financial Institutions (banks, mortgage, and insurance firms).
There was a general belief that some of these entities which were not worth retaining and should be sold, but with preference given to local investors; while others should have a minority state share in the equity. Further, some merely needed better management to turn them around from loss makers into profit margins, and others could have become joint ventures with equity contributed by foreign investors, the state, the workers, other citizens and local entrepreneurs.
1. Demerara Woods Ltd.
There were indeed some controversial privatization deals which took place. The one that received the most publicity was the sale of Demerara Woods Ltd. Lord Beaverbrook, a former treasurer of British Conservative Party, bought the entity in February 1991 for £9.7 million. He also negotiated and obtained a 50-year lease for 1.1 million acres of rain forest. Just two months later, in April 1991, he sold his interests to United Dutch Company for £61 million worth of equity in that firm. The new complex was re-named Demerara Timbers Ltd. Even though Beaverbrook had up to mid-1992 not finished paying the Guyana government for Demerara Woods, he merged the enterprise into the giant United Dutch Company which took control of Demerara Timbers of which he remained a major shareholder.
By 1992, United Dutch valued Demerara Timbers at £74 million! The rainforest concession alone was estimated at between US$160 million to US$206 million.
2. Guyana Timbers Ltd.
The book value of the firm was stated at US$130 million, but it was sold for only US$23.2 million in 1991. Registration fees for its Houston operations amounting to US$178,590 were waived, as were the duty of US$892,900, for the property transfer, and fees of US$555,810 for the firms Winiperu operations a cumulative sum of $1.6 million.
The new firm, styled Caribbean Resources Ltd., continued operations under its new owner, the Caribbean Life Insurance Company (CLICO) of Trinidad and Tobago.
3. National Paint Company Ltd.
This efficient profit-making entity was sold in May 1991 to Stephen Giddings, an overseas-based Guyanese, for US$1.15 million. Giddings lodged US$200,000 as a down-payment and was given until 1993 to pay the rest at 6 percent interest, at a time when the market rate for interest on industrial loans and credit ranged from 35 percent to 40 percent.
Workers at the company had actually made a bid for the entity since 1989. Their bid on May 10, 1989 was US1.0 million, but after some hesitancy on the part of the government, they increased their offer to US$1.2 million. This sum was equivalent to G$150.2 million in 1991, as compared to Giddings offer which was equivalent to G$142.6 million.
Naturally, the workers were very peeved over this sale since their offer involved a down-payment of US$404,000 at the signing of the agreement and US$808,000 in two equal annual installments.
Interestingly, another bidder was a Caricom paint company, McEnearney Alstons Group, which offered US$1.5, with the group owning 51 percent of the equity, government 24 percent and the workers 25 percent.
It should be noted that the down-payment of US$200,000 by Giddings was less than the net value of the stock, outstanding debts owed to the company and other pre-payments minus payments to creditors, which meant that the government of Guyana, in real terms, actually financed the purchase of the company by the new owner!
4. GRMMA complexes
The GRMMA complexes at Black Bush Polder and Corriverton were sold off in August 1991 to the foreign firm, Curacao Investment Trust Company Ltd., for US$3.8 million. But these companies were valued at US$14.9 million. The same firm had earlier bought other GRMMA complexes at Ruimzigt and Wakenaam for US$2.5 million. The value of both complexes, complete with installations and fertile lands, was US$8.5 million.
At Anna Regina, the GRMMA complex, valued at US$14.2 million, was sold to a St Vincent firm for US$4.2 million and was renamed Caricom Rice Mills Ltd.
The sale of these complexes raised much concern among local investors. The problem was not only the sale price, but also the fact that local investors who made higher bids for the entities were ignored. No reasons were given for the rejection of their higher bids.
5.Guyana Telecommunication Corporation
The Guyana Telecommunications Corporation (GTC), which was a profit-making business and net foreign exchange earner, was sold off in late 1990 to Atlantic Tele-Network (ATN), based in the US Virgin islands for US$16.5 million. The GTC was at the time suffering from bad management, but at the time of sale, it had some G$400 million in bank liquidity and outstanding sums due and payable to it, and was earning a net figure of about US$2 million to US$4 million annually.
Based on the sales agreement, ATN acquired 80 percent of the enterprise, with the government retaining the remaining 20 percent. There was much local criticism of the government for disposing of the company for such a low price, and the PPP expressed the view that at least 20 percent of the entity should have been offered to the Guyanese private sector.
The new privatized entity, under the name Guyana Telephone & Telegraph Company Ltd. (GT&T), began operations in January 1991.
In the headlong race to divest state resources before the October 1992 elections, the Hoyte administration began to grant forest concessions to a number of foreign firms. Guyana was actively encouraged by the IMF to exploit its forestry resources and encourage investment in this sector. Companies were offered incentives such as tax holidays, export allowances, and accelerated depreciation. Large foreign investors almost exclusively benefited from these concessions. The sale of Demerara Woods exemplified a case of IMF corporate welfare. The IMF cited Demerara Woods as a priority item for the state to sell despite the fact the bilateral donors and the World Bank had poured a huge amount of financial aid (including £14 million from the European Community) for the development of Demerara Woods. Furthermore, Demerara Woods' debt was underwritten by the government as part of the sale agreement. Thus, the citizens of Guyana subsidized the bargain-basement sale of a timber asset to entice foreign investment into the country (and because the IMF ordered the country to increase foreign investment and sell Demerara Woods).
By early 1992, Hoyte was propagating his ideas of debt for equity and debt for resources swaps. A Venezuelan company, Palmaven, was subsequently given a concession of 300,000 hectares of rainforest on the Demerara River. Then a South Korean-Malaysian consortium, Barama, was also awarded 1.6 million hectares of rainforest and it announced plans to invest US$63 million in logging and plywood production.
Plan to privatize sugar and bauxite industries
Divestment had come about largely because of the accumulated negative impact on political interference with managers, corruption, policies which needlessly antagonized labor, squandermania, budget deficits, siphoning of surpluses from profit-making entities into central coffers to prop up worthless acquisitions, poor marketing intelligence, high interest rates, punitive foreign exchange rates, and lack of accountability.
The strategic sugar and bauxite industries, for example, suffered badly as a result of years of bad management. In 1990, the British firm Booker-Tate was called in to manage the Guyana Sugar Corporation and in very quick time it performed an excellent job of turning around the industry. Then in 1992, the Australian firm, Minproc Engineers Limited (MINPROC), was hired to manage the ailing debt strapped Guyana Mining Enterprises Ltd. (Guymine) which, up to 1992, owed about US$47 million to foreign creditors and suppliers.
But there was suspicion in opposition circles that the two foreign management firms were hired to improve the viability of Guysuco and Guymine in order to attract high prices when they would eventually be put up for sale.
But the planned sale of the sugar corporation ran into broad-based opposition and the government backed down from its original plan to sell the entire entity to foreigners. Very strong opposition came from the militant sugar workers who called a strike protesting the privatization plan, and threatened to continue further work stoppages. As a result, Dr. Kenneth King, Senior Minister of Economic Development, who was in charge of privatization, hurriedly met with the sugar workers union, GAWU, and unveiled new plans on the divestment of Guysuco. While stating that the deadline for Guysucos divestment would remain at July l992, he said the corporation would not be completely sold off to foreigners. Local investors, sugar workers and ordinary citizens would be able to buy 40 percent of the shares, and only enough lands needed to produce 250,000 tons of sugar annually will be leased to the new owners, with the remaining land utilized by Guysuco being retained by the state.
However, in his meeting with GAWU, King was unable to provide the book value of Guysuco. As such he did not know what would be the price for one share, or how much in Guyana dollars would be 40 and 60 percent of the equity. The union insisted that these vital questions should be answered before any privatization step was taken, since it was unusual for something to be sold unless the price was known!
There were other unanswered questions connected to the divestment of Guysuco a giant complex linked to the village systems, the local authorities, the drainage and irrigation systems, ingress and egress facilities to farms in the backlands, potable water supply systems, cultural and sporting facilities, etc. With regard to land ownership, these questions were raised by both the PPP and GAWU: How far was Guysuco as a productive enterprise protruding into state territory? Where were the demarcation lines between Guysuco lands and state lands? What about the thousands of squatters on lands supposedly belonging to Guysuco? Did Guysuco really own these lands? Were they all surveyed? To clear up all these questions, there was the general feeling that specific legislation was needed to enable Guysucos divestment to proceed.
The PPP also stated that strategic entities like the sugar and bauxite complexes needed a special approach. The party felt that putting them under efficient management was a sound idea, but any further steps leading to any form of divestment should be done after intense consultation with political parties, trade unions, the private sector and social organizations, especially those looking after the welfare of people involved in the sugar industry. The party also warned potential buyers that they ought to be aware of the importance to the national economy of the sugar and bauxite industries and should refrain from rushing headlong into any deal with the Hoyte administration at a period when it would be facing the electorate.
After June 1992, the PNC government backed down on its race towards the privatization of Guysuco. While the strong opposition by sugar workers, in particular, was a vital factor in forcing this change of pace, the election campaign and its related administrative processes occupied the attention of the administration to a greater degree. In addition, potential buyers apparently slowed down the process since they did not want to continue negotiations with a government whose mandate was coming to an end.